Why Did Netflix Apologize Now?

Yesterday, I started my day off with breakfast and an apology. A few months after Netflix stirred up quite a bit of unhappiness, they finally got around to saying sorry, and trying to explain why they are raising the prices on their loyal customers.

Here’s the apology/explanation part:

“So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service. [Editorial- Read:”We can’t get permission to stream our entire DVD catalog.”]

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.”

OK, was that so hard? I still don’t like the increase, but we will keep our plans, for now.

But why did my new best friend Reed send this out now?

Well ever since the news that Netflix had lost about a million DVD subscribers, stocks haven’t been doing so well. It seems a million customers decided they really didn’t need DVDs by mail after all. And Netflix sent out a report showing a larger than expected drop. You see, long term this is what Netflix wants. They want out of the mailing business. Here is a chart from back in 2010:

They expect(ed) DVD mailing to peak within a couple of years. And then decline over the next decade or so.

Once they split the DVD and streaming businesses under the Netflix name, and saw a million people opt out of DVD by mail, investors saw their stock drop 14% or so. Uh-oh. Netflix means to phase DVD mailing out anyway, but the more this part of their business declines (which is what they want) the less solid their stocks are (which they don’t want). Netflix has a problem.

Up in the sky! It’s a bird! No, a plane! No, it’s a poorly named spin off here to save the good name of Netflix. Qwikster is here!

The second half of the apology letter announced that Netflix was distancing themselves even more from DVDs by mail. That’s what really makes a good apology, back end it with even more bad news for your customers. Now, if they want to keep DVD streaming, they need to log into a totally different website. Integration is so last decade.

But does Netflix care? A few weeks from now people who do DVDs by mail will be getting them with the new Quikster logo. Netflix will continue to work on deals to stream more content. And people will adjust. Then next quarter when Qwikster shows another decline in subscribers, Netflix stock will not be affected. Because Netflix will be a video streaming site, and it’s perception will be that they don’t have anything to do with mailing DVDs.

I think that is why we got this email apology now. It would have made more sense for Mr. Hastings to have sent this months ago, but they used an apology to soften the extra bit of hassle DVD subscribers were going to have to endure.

“Hey, we are so sorry that we raised our prices by 60% and then ignored all the protest about it, but here’s another minor inconvenience for you. Maybe you won’t notice that we just fire walled ourselves off from the continued decline of DVD by mail subscriptions.”

It’s the last part of the quote above that’s telling:

“So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.”

They could just as well have said, “We realize that streaming is the future even if our investors don’t, so we have split the two businesses. Now we can let the DVD side die off without impacting our stock prices.” Remember the graph, back in 2010 they were projecting the death, not growth, of DVD mailing.

Long term this is probably a very smart move for Netflix. Sure, I won’t like going to Qwikster’s site to handle my DVD queue. But in a few years, I won’t need DVDs by mail, I’ll be streaming all my content.